Advice for transforming our high-end primary residence to a STR (abroad)

[Liz Caskey]

Hello everyone!

We moved to the US in 2021 from Santiago, Chile (I am American and lived abroad 22+ years and my husband is Chilean, now with US residency along with our kids). We are currently rent in Napa, CA and have decided to turn our primary residence we own in Chile into a STR or MTR that we can use for an annual visit and our clients visiting the region (we work in wine travel). I had been wanting to get into real estate for some time as a side hustle so this seems like the perfect opportunity, although with a twist (or complication) of having the property abroad (and less information available on how to do this!).

Background:

We bought our property in 2010, which is a 5BR, 3.5 BA, 3200 sq.ft apartment and lived it in until January 2021 full time. We are halfway through our 25yr mortgage but due to Chile's insanely strict (and unfavorable) mortgage rules, unfortunately cannot pull equity out. The property we bought around $475,000 at the time (paying 25% down) and in 13 years is now over USD$1.1million (our neighbor upstairs and comps are selling for that and our apartment is nicer and has more things...like a wine cellar, full parking spot and 'bodega' (storage) in the middle of city, storage, winter garden, etc.). We have some of the best location in the city on an architectural heritage street, views of the Andes and central park, and walking distance to 3 major metro lines, art museums, hotels, restaurants, etc. It's akin to having a place in central Paris (but in Chile so not quite the same prices...).

We are doing a huge maintenance and refresh of the apartment since it was initially remodeled in 2006 (before we bought in 2010). We have had to redo all electrical, some plumbing as it's an old building (1945), change a kazillion lights to LED, repaint entire apartment, remake some custom cabinets that had water damage due to floods/leaks in upper floors, etc. and replace all the original kitchen appliances that wore out / died. We also are investing in the furniture, installing a cooling system & screens (not common in Chile), and some decor pieces since it has to reach our clientele's standards (we normally use hotel properties like Four Seasons, Ritz Carlton, etc.). The total investment (as in cash out of our personal savings) is going to be around US$55,000 just to put it into service!

My husband is dedicated to this full time as he has been managing our architect/contractor and project manager remotely along with making purchases for the apartment, working on design, etc. 

Questions:

#1 When you put a property into service, do you need to get an up-to-date appraisal? Who does this usually and what documents make it official? We did not have this done for any US tax purposes when we bought the property since I never needed to do an itemized tax return (mortgage interest wasn't enough to make sense), and my husband (who was only a Chilean resident/citizen at the time), didn't declare with me. Now it seems it may be necessary to establish a baseline of the property real market value and harness depreciation for our US taxes. Property taxes in Chile are not really accurate of property value since they are very cheap and do not fund things like schools, municipal works, etc. Not sure how this works. 

#2 Since my husband is FT working on the real estate side (as I have been with less hours), that would allow us to use our this 'passive income' once in service later this year to offset my W2 income. We'd like to leverage bonus depreciation before it scales down again next year (and disappears...) through a cost segregation studies. Everything I am seeing in forums is about US-based cost segregation but there is no limitation (or so I understand) based on location (outside the US) from an IRS tax standpoint. Is it possible to hire someone locally to carry out the necessary inspections and have an officially translated report of this? Where can we get a clear set of established guidelines that a certified engineer could do on our property (we would be there with them) and then have this certified again if need be with a notary? Depreciation (linear) for foreign properties is 30 years so obviously it is beneficial to use bonus depreciation to offset not only W2 income yet also recover the cash invested up front. I feel we need a CPA to partner with who understands international real estate so we can employ the right strategies and have the correct documentation in order. Which leads me to the next point...

#3 Do any of you have recommendations of CPA practices that have experience in dealing with foreign real estate and these situations? I have a basic understanding of the STR loophole but would also like to understand MTR with services since we will have the opportunity to provide daily housekeeping, a private chef, PA, etc. to our guests, too. We have been tracking all expenses, time invested/worked in the project, have receipts, etc. It's pretty much like running a business!

#4 Our initial goal is to break even with cash flow on this (i.e. maintain our home at zero cost as an appreciating asset we can also enjoy/use when we visit Chile) and recover the initial investment we made to place into service. We live in a co-op structure so in no case can it be, nor do we wish this to become an Airbnb.  These are vetted private clients of ours from the US the board will know about it. Has anyone done this with their home? It's a bit of a different concept although I believe fully possible to leverage this beautiful, historical asset and make it work for us. 

Thank you for any insights, tips, and recommendations of professionals.